Thursday, October 30, 2008


By Jeff Jacoby

"The choice you'll have," said Barack Obama during last week's final presidential debate, as he told voters what to expect if John McCain's health-insurance proposal becomes law, "is having your employer no longer provide you health care. "Don't take my word for it," he added. "The US Chamber of Commerce, which generally doesn't support a lot of Democrats, said that this plan could lead to the unraveling of the employer-based health care system."

If only. An end to employer-based health insurance is exactly what the American health-care market needs. Far from being a calamity, it would represent a giant step toward ending the current system's worst distortions: skyrocketing premiums, lack of insurance portability, widespread ignorance of medical prices, and overconsumption of health services.

With more than 90 percent of private health care plans in the United States obtained through employers, it might seem unnatural to get health insurance any other way. But what's unnatural is the link between health care and employment. After all, we don't rely on employers for auto, homeowners, or life insurance. Those policies we buy in an open market, where (as a rule) numerous insurers and agents compete for our business. Health insurance is different only because of an idiosyncrasy in the tax code dating back 60 years -- a good example, to quote Milton Friedman, of how one bad government policy leads to another.

During World War II, federal wage controls barred employers from raising their workers' salaries, but said nothing about fringe benefits. So firms competing for employees at government-restricted wages began offering medical insurance to sweeten employment offers. Even sweeter was that employers could deduct those benefits as business expenses, yet employees didn't have to report them as taxable income. For a while the IRS resisted that interpretation, but Congress eventually enshrined the tax-exempt status of employer-based medical insurance in law.

Result: a radical shift in the way Americans paid for medical care. With health benefits tax-free if they were employer-supplied, tens of millions of Americans were soon signing up for medical insurance through work. As tax rates rose during the postwar decades, so did the incentive to keep expanding untaxed health benefits. No longer was medical insurance reserved for major expenditures like surgery or hospitalization. Americans who would never think of using auto insurance to cover tune-ups and oil changes grew accustomed to having their medical insurer pay for yearly physicals, prescriptions, and other routine expenses.

We thus ended up with a health care system in which the vast majority of bills are covered by a third party. (For most workers, that third party is an insurance company paid by their employers; for the poor and elderly, who rely on Medicare and Medicaid, it's the government.) With someone else picking up the tab, Americans got used to consuming medical care without regard to price or value. After all, if it was covered by insurance, why not go to the emergency room for a simple sore throat? Why not get the name-brand drug instead of a generic?

Unconstrained by consumer cost-consciousness, health care spending has soared, even as overall inflation has remained fairly low. Nevertheless, Americans know almost nothing about the costs of their medical care. (Quick quiz: What does your local hospital charge for an MRI scan? To deliver a baby? To set a broken arm?) When patients think someone else is paying most of their health care costs, they feel little pressure to learn what those costs actually are -- and providers feel little pressure to compete on price. So prices keep rising, which makes insurance more expensive, which makes Americans ever-more worried about losing their insurance - and ever-more dependent on the benefits provided by their employer.

De-linking medical insurance from employment is the key to reforming health care in the United States. McCain proposes to accomplish that by taking the tax deduction away from employers and giving it to employees. With a $5,000 refundable health care tax credit, Americans would have a strong inducement to buy their own, more affordable, insurance, rather than relying on their employer's plan. As millions of empowered consumers began focusing on price, price competition would flourish. And as employers' health care costs declined, most of the savings would return to employees as higher wages.

For 60-plus years, a misguided tax preference for employer-sponsored health insurance has distorted America's health care market. The price of that distortion has been paid in higher costs, fewer choices, and mounting anxiety. The solution is to restore market forces by fixing the tax code, and liberating Americans from an employer-based system that has made everything worse.


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